Importance of Management Accounting in Amana Ltd.

This report discusses the importance of management accounting in Amana Ltd., a tourist business located in England. It analyzes the impact of the Covid-19 pandemic on the company's revenue and profit, and provides recommendations for performance evaluation and cost management.

Management
Accounting

Table of Contents
Introduction-................................................................................................................................................3
Task 1-.........................................................................................................................................................3
Task 2-.........................................................................................................................................................5
Conclusion-.................................................................................................................................................6
References-..................................................................................................................................................8

Introduction-
In this report, Importance of management accounting is discussed. It plays pivotal role in
organization. It helps management in decision making. Planning can be done properly so that
losses can be eliminated. It also helps in evaluation and performance monitoring of the company.
This report analyzes Amana ltd. It is a tourist business and located at England. This company is
famous for selling souvenir. Company has been doing well for 40 years and successfully
understood the dynamic nature of tourist sport. But recently, due to Covid-19 pandemic
government imposed restriction on movement and travel. This put impact on company’s revenue
and profit. So, detailed discussion about company is done in report.
Task 1-
(a) Cost report-
Particulars Cost
per
unit
Original Flexed Actual Variances
Units 1,00,000 20000 80,000
Selling price 25 2,000,000
Revenues 2,000,000
Variable costs:
Materials 2.50 2,50,000 3000 2,80,000 (30000)
Labor 4 4,00,000 40000 4,40,000 (40000)
Overhead 1.50 1,50,000 30000 1,20,000 30000
Contribution 17 17,00,000 5400000 11,60,000 540000
Fixed cost
Warehouse rental 200000 2,00,000 30000 1,70,000 30,000
Insurance 100000 100,000 Nil 100,000
Fulltime warehouse
supervisory salary
50,000 50,000 15000 35,000 15,000
Profit -70000

(b) Amana’s performance in the year 2020-
Comparison of planned budget and actual
budget
Planned
Budget
Actual
Budget
Revenue 25,00,000 16,00,000
Less: Cost of goods sold 1150000 1110000
Variable cost
Material 2,50,000 2,80,000
Labor 4,00,000 4,40,000
Overheads 1,50,000 1,20,000
Contribution 17,00,000 7,60,000
Fixed cost
Warehouse Rental 2,00,000 1,70,000
Insurance 1,00,000 1,00,000
Fulltime warehouse supervisor salary 50,000 35,000
Net Income 1350000 490000
(c) Performance evaluation and recommendations-
From the above cost report and performance report it can be said that pandemic affect the
Amana ltd. Above reports consist of original budget, flexed budget, actual budget and
variance. When a budget is rewritten for actual level of activity then it is known as flexed
budget. Variance shows the difference between original budget and actual budget.
In Budget there are two types of variances- favorable and unfavorable. Favorable variances
are those variances which has positive sign where as unfavorable shows negative sign. In the
above report it is observed that there are unfavorable variances. Unfavorable variances are
those variances which show the negative sign. It means there is shortfall in budget. Budget
shortfall causes due to higher than expected value. Variance can be calculated by subtracting
original budget with actual budget. Variance is affected by controlled an uncontrolled factors
within organization. Controlled factors include poor planning of budget and cost of labor. On
the other hand, uncontrollable factors are external factors like- natural disaster and pandemic.
Company gets affected by pandemic as tourist sports are imposed by government. Pandemic
comes under uncontrollable factor. Company cannot control this factor.

From the performance report, it is observed that actual income is less than planned budget.
Units price in the year 2020 are less than planning and also units produced in the year is less
than expected. This thing affected the whole revenue.
Variable cost and fixed cost are considered in making budget. Variable cost can be defined as
it changes in proportion to production or sales. On the other hand fixed cost does not change
with the change in production or sales. Like- rent, insurance etc.
In the report, there are three types of variable costs included which are material, labor and
overheads. In fixed cost it includes warehouse rental, insurance and salary of the employees
and workers. Contribution can be calculated by revenue minus variable cost. There is huge
difference in contribution of planned and actual budget. Planned budget’s contribution is
17,60,000 whereas contribution of actual budget is 7,00,000. Main cause of this difference is
covid-19 pandemic. Due to pandemic there is increase in material cost and labor cost also
increased because company is not able to find workers. And this thing affected income
earned by company.
Recommendations-
 In this hard time company needs to indentify the changes and should manage them
accordingly. Change in net income impacts the stakeholders. So, company needs to
keep them up to date regarding total sales and profit earned by the company.
Company also needs to share details of change in management to share holders.
 Company can effectively manage its budget if company focuses on key performance
indicators. Key performance indicators help in determining that how much planned
budget is different from the actual budget. There are some KPI’s which are used in
budget management such as- actual cost, cost variance, earned value, planned value
and return on investment.
 A company which is running without budget management often leads to failure. After
doing budget management it is also necessary for the company to manage it
frequently. If budget is overrunning up to 10% then it is controllable for the company.
But if budget is overrunning up to 50% then it cannot be controlled by the company

and organization may faces losses in future. Hence, budget management plays an
important role in company.
 To maintain company’s presence it needs to focus on cost cutting. Cost cutting can be
done by 5 ways which are as follows-
Suspension of bill- It includes Loans, rent, credit cards and suppliers. Company
needs to contact banks and lenders so that they can suspend their payment. Before
postponing the bills, company should understand the suspension period, repayment
due date and interest rates. Company should ask their landlord for suspension about
payment. Company needs to talk with suppliers about the negotiation in prices of
material.
Reduced unnecessary expenses- Cost cutting can be done by reducing unnecessary
spending. It includes equipments taken on lease, Travelling, Office space and
software.
Payroll spending- It is counted under largest expense of the company. Company can
terminate some employees to save money. Instead of terminating employees company
needs to think about innovative ideas. Company can reduce the working hours of the
employees to save the payroll. Company should give opportunity to employees to
work from home so that cleaning cost, energy and other costs can be cut. Company
needs to suspend some benefits in order to maintain the budget.
Cheaper options- In order to increase the sales company should move to online
sales. Digital is new trend now- a-days. Digital marketing of the products is the best
option to increase sales. If company uses this option then it helps in reducing
overheads and marketing cost. Company needs to focus on internet service providers
to get the cheaper plan than its competitors.
Investment in affordable marketing- Company needs to cut the marketing expenses
in such conditions. Company needs to prioritize its marketing strategies. Campaigns
which are not performing good company should eliminate them. Company needs to
start new campaigns which provide more efficiency to the business. Managers need to
do free publicity of the product to increase the sales of the company. To increase sales
company can give postcard or coupon to every resident.

Task 2-
In this part Mr. Amana noticed that its competitors are going online in order to increase sales.
Here company has two options either up gradation of company’s website by programmer or
company needs to get registered itself with Amazon. This decision is very difficult for the
company as there are many factors which are affecting sales of the company.
Scenario 1-
If company chooses this scenario then cost estimation would be -
Scenario 1 Cost (in £)
Setting delivery network 1,50,000
Website up gradation 50,000
IT programmer fees 35,000
Net Charges 4,35,000
Here three types of costs are included which are setting internet service provider, website up
gradation and fees of IT programmer. So, here net charges are 4, 35,000 (in £). According to the
market research, this option will be providing the guaranteed sales of 10,000 annually.
Scenario 2- Cost estimation in this scenario is only 50,000(in £). It is registration fees of
Amazon. In this scenario company just needs to get itself registered with Amazon and online
sales of the product will be started. Guaranteed sales with this scenario are 65,000 units and
company can not control prices and return policy.
After analyzing both the scenario it can be said that company should go with the second option.
As company is already facing pandemic. This is not controllable. There is more safety with
option A but right now company is not in good condition. Company cannot invest 4, 35,000 to

generate online sales. At first company needs to earn profits so it should start from small
platform. Amazon registration fees is very lower than all the charges in scenario 1. As pandemic
is for uncertain time period. No one is able to know when it will be end. Amazon sales can be
increased if there is increase in demand of the product. It is also providing guaranteed sales of
products which is also a plus point for the company. Company will make good profits with this
option with less investment. After earning profits from this scenario company can move to
option one. Option one will help company more in increasing sales. But option one can be
choose by company after everything gets normalized. Otherwise company will be facing more
problems in generating revenues and it will also be hard for company to survive in such
condition.
Scenario 1 is more costly than scenario 2. Right now company is looking at cost cutting factors
and it will be very hard for company to invest such a big amount in the online sales. Hence,
Scenario two is best fitted for the company according to present condition.
Company should also notice their competitors move. Competitors’ moves affect the company
revenue. If rivals are performing better then it is drawback for the company. Company should
track performance of the competitors. In today’s world in every stream competition is very high.
To track the performance of rivals, company should analyze their financial ratios. Financial
ratios tell the whole story. Company should also analyze the path which rivals are using. If that
path is also fruitful according to company’s budget then company should use such path.
Hence, it can be said that first of all company should go with option number two. Then company
needs to track the performance of its competitors. When sales of the company come to stable
condition then company should go with first scenario. Because first scenario is giving 10,000
unit guaranteed sales which is higher than second scenario. Company will also be having control
over prices and return policy.
Conclusion-
From the above report, it can be said that cost and accounting management is very important for
every company. If all the costs are properly managed then company can achieve its goals or
objectives. Budget plays an important role in company. In this report, budget of Amana ltd. was
not meeting expectations. This happened because of some factors which are uncontrollable.

Company is facing pandemic in country which is affecting business badly. Company can
maintain budget by using various methods. All the methods are discussed in the report. With the
help of recommendations company can increase its sales. It is also discussed that which path
company should use to increase the sales. As sales is main income source of the company. Due
to lockdown in the country company cannot sell its products offline. So, after seeing its
competitors company decided to sell its products online. In this case, company had two scenarios
and it is very difficult for company to choose one as every scenario has its drawback. But
Company goes with first scenario as company has to maintain its sales. Hence, it can be said that
uncontrollable factors affected company’s budget but however company can maintain its budget
by using various techniques and methods.
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